SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 29, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____________________To ____________________
Commission File Number 0-1859
KNAPE & VOGT MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
|
Michigan (State of Incorporation) 2700 Oak Industrial Drive, NE Grand Rapids, Michigan (Address of principal executive offices) |
38-0722920 (IRS Employer Identification No.) 49505 (Zip Code) |
(616) 459-3311
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
| 2,292,547 | common shares were outstanding as of April 25, 2003 |
| 2,223,088 | Class B common shares were outstanding as of April 25, 2003 |
| Page No. |
| PART I | FINANCIAL INFORMATION |
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| Item 1. | Financial Statements. |
||
|
Condensed Consolidated Balance Sheets - --March 29, 2003 and June 29, 2002.................................................................................................... Condensed Consolidated Statements of Income - --Nine Months and Three Months Ended March 29, 2003 and March 30, 2002................................ Condensed Consolidated Statement of Stockholders' Equity - --Nine Months Ended March 29, 2003................................................................................................ Condensed Consolidated Statements of Cash Flows - --Nine Months Ended March 29, 2003 and March 30, 2002............................................................... Notes to Condensed Consolidated Financial Statements..................................................................... |
2 3 4 5 6-10 |
||
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations.............. |
11-13 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk............................................................ |
14 | |
| Item 4. | Controls and Procedures...................................................................................................................... |
14 | |
| PART II | OTHER INFORMATION |
||
| Item 1. | Legal Proceedings................................................................................................................................. |
15 | |
| Item 6. | Exhibits and Reports on Form 8-K..................................................................................................... |
15 | |
| SIGNATURES ............................................................................................................................................................................. | 16 |
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| SECTION 302 CERTIFICATIONS .......................................................................................................................................... | 17-18 |
||
1
(Unaudited)
March 29, 2003 June 29, 2002
-------------------- -----------------
Assets
Current assets
Cash $ 4,880,330 $ 5,430,543
Accounts receivable - net 17,247,281 17,025,929
Inventories 16,530,205 13,162,145
Prepaid expenses 1,654,971 1,530,967
-------------------- -----------------
Total current assets 40,312,787 37,149,584
-------------------- -----------------
Property, plant and equipment 82,515,592 80,739,965
Less accumulated depreciation 48,086,462 43,479,535
-------------------- -----------------
Net property, plant and equipment 34,429,130 37,260,430
-------------------- -----------------
Goodwill 4,772,837 4,772,837
Prepaid pension cost 8,376,717 8,416,900
Other assets 298,345 291,667
-------------------- -----------------
$ 88,189,816 $ 87,891,418
==================== =================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 11,640,464 $ 9,849,513 $
Other accrued liabilities 9,090,323 10,114,260
-------------------- -----------------
Total current liabilities 20,730,787 19,963,773
Long-term debt and capital leases 20,055,672 20,000,000
Deferred income taxes and other long-term liabilities 12,363,850 11,714,426
-------------------- -----------------
Total liabilities 53,150,309 51,678,199
-------------------- -----------------
Stockholders' Equity
Common stock (Common - 2,292,547 and 2,272,754 shares issued,
Class B common - 2,223,088 and 2,244,398 shares issued,
Preferred - unissued) 9,031,270 9,034,304
Additional paid-in capital 7,538,684 7,550,062
Unearned stock grant (94,500) (94,500)
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment 4,065 (85,799)
Derivative adjustment (1,596,011) (1,041,158)
Minimum supplemental executive retirement plan
liability adjustment (1,028,321) (1,027,503)
Retained earnings 21,184,320 21,877,813
-------------------- -----------------
Total stockholders' equity 35,039,507 36,213,219
-------------------- -----------------
$ 88,189,816 $ 87,891,418 $
==================== =================
See accompanying notes.
2
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
For the Nine Months Ended For the Three Months Ended
------------------------- --------------------------
Mar. 29, 2003 Mar. 30, 2002 Mar. 29, 2003 Mar. 30, 2002
--------------- --------------- --------------- ---------------
Net sales $ 93,309,198 $ 97,385,831 $ 32,091,118 $ 33,142,872
Cost of sales 72,928,291 75,602,349 25,344,795 25,454,736
--------------- --------------- --------------- ---------------
Gross profit 20,380,907 21,783,482 6,746,323 7,688,136
Selling and administrative expenses 17,495,632 16,827,493 6,423,741 5,973,860
Severance 271,325 - - -
--------------- --------------- --------------- ---------------
Operating income 2,613,950 4,955,989 322,582 1,714,276
Other expenses 954,870 1,123,234 318,193 415,649
--------------- --------------- --------------- ---------------
Income before income taxes 1,659,080 3,832,755 4,389 1,298,627
Income taxes 217,000 1,338,000 (391,000) 454,000
--------------- --------------- --------------- ---------------
Net income $ 1,442,080 $ 2,494,755 $ 395,389 $ 844,627
=============== =============== =============== ===============
Basic and diluted earnings per share: $ 0.32 $ 0.54 $ 0.09 $ 0.19
=============== =============== =============== ===============
Weighted average shares outstanding 4,517,063 4,585,506 4,516,244 4,542,635
Cash dividend - common stock $ .495 $ .495 $ .165 $ .165
Cash dividend - Class B common stock $ .45 $ .45 $ .15 $ .15
See accompanying notes.
3
CONDENSED CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
Accumulated
Additional Unearned other
Common paid-in stock comprehensive Retained
stock capital grant loss earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, June 29, 2002 $ 9,034,304 $ 7,550,062 $ (94,500) $ (2,154,460) $ 21,877,813 $ 36,213,219
Comprehensive income (loss)
Net income - - - - 1,442,080 1,442,080
Foreign currency translation adjustment - - - 89,864 - -
Minimum SERP liability adjustment - - - (818) - -
Loss on derivative instrument - - - (554,853) - -
--------------
Other comprehensive loss - - - (465,807) - (465,807)
--------------
Comprehensive income 976,273
--------------
Cash dividends - - - - (2,135,573) (2,135,573)
Repurchase of common stock (4,560) (19,389) - - - (23,949)
Restricted stock forfeited (100) (601) - - - (701)
Restricted stock issued 1,626 8,612 - - - 10,238
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 29, 2003 $ 9,031,270 $ 7,538,684 $ (94,500) $ (2,620,267) $ 21,184,320 $ 35,039,507
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
4
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-----------------
Mar. 29, 2003 Mar. 30, 2002
------------------ ------------------
Operating Activities:
Net income $ 1,442,080 $ 2,494,755 $
Non-cash items:
Depreciation and amortization 5,016,707 5,598,428
Deferred income taxes 47,000 (560,000)
Other long-term liabilities 85,632 70,232
Severance 103,769 -
Loss on disposal of fixed assets 103,720 248,498
Changes in operating assets and liabilities:
Accounts receivable (159,105) 1,838,395
Inventories (3,368,060) 309,807
Other current assets (123,668) 264,055
Accounts payable and accrued expenses 939,256 1,101,683
------------------- ------------------
Net cash provided by operating activities 4,087,331 11,365,853
------------------- ------------------
Investing Activities:
Additions to property, plant and equipment (2,763,875) (3,236,926)
Proceeds from sales of property, plant and equipment 243,527 1,487,201
Other (33,123) (60,980)
------------------- ------------------
Net cash used for investing activities (2,553,471) (1,810,705)
------------------- ------------------
Financing Activities:
Dividends paid (2,135,573) (2,164,895)
Repurchase and retirement of common stock (23,949) (928,924)
Borrowings on long-term debt - 25,740,000
Payments on long-term debt and capital leases (3,013) (29,490,000)
------------------- ------------------
Net cash used for financing activities (2,162,535) (6,843,819)
------------------- ------------------
Effect of Exchange Rate Changes on Cash 78,462 (96,999)
------------------- ------------------
Net Increase/ (Decrease) in Cash and Equivalents (550,213) 2,614,330
Cash and equivalents, beginning of year 5,430,543 2,113,940
------------------- ------------------
Cash and equivalents, end of period $ 4,880,330 $ 4,728,270 $
=================== ==================
Cash Paid During the Period - interest $ 1,080,612 $ 1,137,152 $
- income taxes $ 200,000 $ 1,990,000 $
See accompanying notes.
5
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited condensed consolidated financial statements and related notes have been prepared reflecting all adjustments, which are, in the opinion of management, necessary for a fair presentation of the statements of financial position, results of operations and cash flows and consist of only normal recurring adjustments. Interim results are not necessarily indicative of the results for the year-end and are subject to year-end adjustments, and audit by independent public accountants. The condensed consolidated financial statements and notes should be read in conjunction with the Company’s 2002 annual report.
The Company utilizes a 52- or 53-week fiscal year, which ends on the Saturday nearest the end of June. The fiscal years ending June 29, 2002 and June 28, 2003 each contain 52 weeks. Both nine-month periods contained 39 weeks and ended on March 29, 2003 and March 30, 2002.
Certain prior year information has been reclassified to conform to the current year presentation.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets, effective for the Company in fiscal 2003. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to impairment tests at least annually in accordance with SFAS 142. Other intangible assets will continue to be amortized over their contractual lives.
The Company adopted SFAS No. 142 in the first quarter of fiscal 2003. Application of the nonamortization provisions of SFAS No. 142 resulted in an increase in net earnings of approximately $237,000 ($0.05 per diluted share) per year. The Company performed the required impairment tests of goodwill as of the first day of fiscal 2003 and determined that the recorded goodwill was not impaired.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS 146 requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by this standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002 and is not expected to have a material impact on the results of operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor’s Accounting And Disclosure Requirements For Guarantees, Including Indirect Guarantees Of Indebtedness Of Others (FIN 45). FIN 45 clarifies the requirements for a guarantor’s accounting for and disclosure of certain guarantees issued and outstanding. The initial recognition and initial measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which amends SFAS No. 123, Accounting For Stock-Based Compensation. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirement of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements of the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The Company has elected to continue to apply Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for its stock option plans, as permitted under SFAS No. 123 and SFAS No. 148. Accordingly, no compensation cost has been recognized for its stock option plans.
6
The Company uses an interest rate swap agreement to modify a portion of the variable rate revolving line of credit to a fixed rate obligation, thereby reducing the exposure to market rate fluctuations. The interest rate swap agreement is designated as a hedge, and effectiveness is determined by matching the principal balance and terms with that specific obligation. Amounts currently due to or from interest-rate-swap-counter parties are recorded in interest expense in the period in which they accrue. The derivative was recognized as a liability on the balance sheet at its fair value of $2,455,011 at March 29, 2003 and $1,602,158 at June 29, 2002.
The Company has 6,000,000 shares of common stock and 4,000,000 shares of Class B common stock authorized. All of the stock is $2 par/share.
The following table reconciles the numerators and denominators used in the calculations of basic and diluted earnings per share (EPS) for each of the periods presented:
For the nine months ended For the three months ended
------------------------- --------------------------
Mar. 29, 2003 Mar. 30, 2002 Mar. 29, 2003 Mar. 30, 2002
----------------- ----------------- -------------------- --------------------
Numerators:
Numerator for both basic and
diluted EPS, net income $1,442,080 $2,494,755 $395,389 $844,627
================= ================= ==================== ====================
Denominators:
Denominator for both basic and
diluted EPS,weighted-average
common shares outstanding 4,517,063 4,585,506 4,516,244 4,542,635
================= ================= ==================== ====================
The following exercisable stock options were not included in the computation of diluted EPS because the option prices were greater than average quarterly market prices.
Mar. 29, 2003 Mar. 30, 2002
--------------------- --------------------
Exercise Price
$13.64 7,150 19,832
$14.09 8,800 20,075
$16.74 7,265 10,291
$18.18 6,600 9,350
$18.41 130,240 -
$26.54 61,413 61,413
Inventories are valued at the lower of FIFO (first-in, first-out) cost or market. Inventories are summarized as follows:
Mar. 29, 2003 June 29, 2002
------------- -------------
Finished products $ 11,455,217 $ 8,767,282
Work in process 1,894,981 1,728,418
Raw materials 3,180,007 2,666,445
-------------- --------------
Total $ 16,530,205 $ 13,162,145
============== ==============
7
The Company estimates the amount of warranty claims on sold product that may be incurred based on current and historical data. The actual warranty expense could differ from the estimates made by the Company based on product performance. The following table presents the changes in the Company’s product warranty liability:
Accrued warranty costs at June 29, 2002 ...... $ 234,615
Payments made for warranty costs ............ (115,293)
Accrual for product warranty ................ 149,048
-------------------
Accrued warranty costs at March 29, 2003 .... $ 268 370
===================
During the third quarter of fiscal 2003, the Company amended its income tax returns previously filed for fiscal years 1997 and 1999. A change in the federal tax law allowed the Company to utilize a portion of its capital loss from fiscal 1999 that had been previously disallowed. As a result of this change, the Company recognized an income tax benefit of $407,000 in the quarter ended March 29, 2003.
Comprehensive income represents net income and other revenues, expenses, gains and losses that are excluded from net income and recognized directly as a component of stockholders’ equity.
Comprehensive income and its components consist of the following:
For the Nine Months Ended For the Three Months Ended
------------------------- --------------------------
Mar. 29, 2003 Mar. 30, 2002 Mar. 29, 2003 Mar. 30, 2002
----------------- ---------------- ----------------- ----------------
Net income $1,442,080 $2,494,755 $395,389 $ 844,627
Other comprehensive income:
Foreign currency translation adjustment 89,864 (121,304) 173,491 (9,375)
Gain (loss) on derivative instrument (554,853) (283,370) 43,411 160,955
Minimum SERP liability adjustment (818) 1,337 (1,731) 100
----------------- ---------------- ----------------- ----------------
Comprehensive income $ 976,273 $2,091,418 $610,560 $996,307
================= ================ ================= ================
Other comprehensive income (loss) related to the interest rate swap agreement consisted of the following components:
For the Nine Months Ended For the Three Months Ended
------------------------- --------------------------
Mar. 29 2003 Mar. 30 2002 Mar. 29 2003 Mar. 30 2002
-----------------------------------------------------------------------------------------------------
Pre-Tax After-Tax Pre-Tax After-Tax Pre-Tax After-Tax Pre-Tax After-Tax
-----------------------------------------------------------------------------------------------------
Change in fair value of
interest rate swap $(162,510) $(105,632) $61,495 $39,972 $309,077 $200,900 $459,728 $298,823
Settlement to interest expense (690,343) (449,221) (497,417) (323,342) (242,666) (157,489) (212,104) (137,868)
-----------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $(852,853) $(554,853) $(435,922) $(283,370) $66,411 $43,411 $247,624 $160,955
=====================================================================================================
8
The following table presents information about the results of operations for each of the Company’s reportable segments for the nine months and three months ended March 29, 2003 and March 30, 2002, respectively.
Home and
Commercial Corporate and Consolidated
For the Nine Months Ended: Office Products Products Other Total
----------------------------------------------------------------------------
March 29, 2003:
Net sales $26,714,159 $66,595,039 $ - $93,309,198
Operating income (loss) 728,903 9,542,104 (7,657,057) 2,613,950
March 30, 2002:
Net sales 29,272,472 68,113,359 - 97,385,831
Operating income (loss) (1,083,792) 9,353,341 (3,313,560) 4,955,989
Home and
Commercial Corporate and Consolidated
For the Three Months Ended: Office Products Products Other Total
---------------------------------------------------------------------------
March 29, 2003:
Net sales $8,130,900 $23,960,218 $ - $32,091,118
Operating income (loss) (333,009) 3,022,416 (2,366,825) 322,582
March 30, 2002:
Net sales 8,777,385 24,365,487 - 33,142,872
Operating income (loss) (737,001) 3,307,960 (856,683) 1,714,276
During fiscal 2000, the Company offered its former powder coat facility for sale. As a result of this decision, the related assets of $1,779,405 were transferred to other assets and a loss of $105,000 was recorded in the fourth quarter of fiscal 2000 based upon a buy/sell agreement. The purchaser was unable to close the transaction and the building remained listed with a real estate broker. In addition, the Company had listed a former facility in Muncie, Indiana for sale. Based upon new information obtained during the third quarter of fiscal 2001 regarding the current fair market value of the facilities held for sale, the Company recorded an additional impairment loss of $300,000 pre-tax. During the second quarter of fiscal 2002, both facilities were sold. No additional losses were recorded upon the ultimate sale of the facilities.
In September 1998 when the Company sold The Hirsh Company, the purchaser assumed the lease for the facility located in Skokie, Illinois. The Company guaranteed all of the lease obligations to the landlord through the expiration of the lease in August 2000. During fiscal 2000, the purchaser defaulted on the lease agreement. In May 2000, the landlord filed suit in the Cook County, Illinois Circuit Court against the purchaser and the Company as the guarantor. The claim was for unpaid rent, unpaid property taxes, building repairs and legal costs. On September 25, 2002, a settlement agreement was reached among the parties. During October 2002, the Company made a cash-payment under the settlement to the plaintiff in the amount of $300,000, which had been previously accrued on the balance sheet.
During the second quarter of fiscal 2003, the Company settled certain legal concerns involving potential royalty issues. As a result, the Company reported a pre-tax gain of approximately $800,000 as an offset to selling and administrative expenses in the statement of income.
9
The Canada Customs and Revenue Agency (“CCRA”) has performed an audit of the Company’s sales to its wholly-owned subsidiary, Knape & Vogt Canada. Preliminary results from a joint review by the Company and its customs broker indicate that the Company will be liable for certain customs transactions, however, the amount of any such potential liability is unknown at this time. The Company is defending its position that Knape & Vogt Canada is the importer of record for all Knape & Vogt goods shipped into Canada and management believes, that based on the information available at this time, any liability owed to the CCRA will not have a material adverse effect on the Company’s earnings.
The Company is also subject to other legal proceedings and claims, which arise in the ordinary course of business.
10
Certain matters discussed in this section include forward-looking statements involving risks and uncertainties. When used in this document, the words “believes,” “expects,” “anticipates,” “goal,” “think,” “forecast,” “project,” and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements concerning future revenue and net income growth. Such statements are subject to certain risks and uncertainties, which would cause actual results to differ materially from those expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on those forward-looking statements that speak only as of the date of this report.
Net sales for the third quarter of fiscal 2003 were $32.1 million compared to $33.1 million for the same period in the prior year. Net sales for the first nine months of fiscal 2003 were $93.3 million, compared to $97.4 million in the prior year.
During the third quarter of fiscal 2003, the Home and Commercial division had net sales of $24.0 million compared to $24.4 million in the third quarter of fiscal 2002. Net sales for the first nine months of fiscal 2003 were $66.6 million compared to $68.1 million for the same period in the prior year. During the first quarter of fiscal 2003, the Company launched a consignment inventory program for certain customers within this division. The program has expanded during the year and the consignment inventory balance at the end of the quarter was $2.9 million. The Company has realized increased sales from those customers participating in this program. In the retail channel, the Company has been successful in placing several of its new products, including products from its kitchen and bath accessory line and its ergonomic product line. The slight decline in sales for this division, both in the third quarter and the first nine months, was primarily attributable to a decline in sales to the Company’s OEM kitchen and bath customers. Near the end of the third quarter, the Company realigned its sales force to better target this market.
The Office Products division had net sales of $8.1 million for the third quarter of fiscal 2003, compared to $8.8 million for the same period in the prior year. Net sales for the first nine months of fiscal 2003 were $26.7 million compared to $29.3 million for the same period in the prior year. The decline resulted from lower sales to the division’s OEM office furniture customers. The office furniture industry shipments, as a whole, have continued to decline as seen in the Business and Institutional Furniture Manufacturers’ Association (BIFMA) results for the months of January and February 2003, which showed a decline of approximately 8%. BIFMA reported a decline in shipments and orders of approximately 11% for the eight months ended February 2003. Despite the downturn in this market, the Company has been able to post modest growth in sales to the office furniture dealer channel with sales of its idea@WORK™ product line. The increased sales growth of this key product line reflected a gain in market share, along with sales from new products, such as the Mantis™ flat screen monitor arm, the Keynetix™2 adjustable keyboard and the Captor™ CPU holder.
In total, the Company had new product sales of $8.1 million in the first nine months of fiscal 2003 compared to $5.3 million in the same period in fiscal 2002.
Gross profit, as a percentage of net sales, was 21.0% for the third quarter and 21.8% for the first nine months of fiscal 2003 compared to 23.2% and 22.4%, respectively, for the same periods in the prior year. The lower sales volumes both in the third quarter and the first nine months of fiscal 2003 made it more difficult for the Company to fully leverage its fixed overhead costs, however, the Company has been successful in maintaining its focus on lean manufacturing and lowering its internal costs, along with identifying competitive alternative sourcing options, when applicable. In addition, gross margins have benefited from a higher sales mix of ergonomic and Real Solutions For Real Life™ products, which have a higher profit margin, and higher sales into its more profitable market channels.
11
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Selling and administrative expenses, as a percentage of net sales, were 20.0% for the third quarter and 18.8% for the first nine months of fiscal 2003 compared to 18.0% and 17.3%, respectively, for the same periods in the prior year. During the second quarter of fiscal 2003, the Company recognized a pre-tax gain of $0.8 million due to the successful resolution of certain legal matters. Excluding this gain, selling and administrative expenses would have been 19.6% for the first nine months of fiscal 2003. The increase from the prior year was due in part to the higher selling costs associated with the ergonomic product line combined with the Company’s advertising and marketing costs incurred to launch new products in both of its divisions. The Company has also incurred costs to reintroduce its line of kitchen and bath accessories under the Real Solutions For Real Life™ logo. Finally, the Company has made significant investments in its selling efforts to the distribution channel in an effort to aggressively grow sales in this key market.
During the first quarter of fiscal 2003, the Company recorded $271,325 pre-tax of severance costs, primarily related to the resignation of two of its executive officers in August 2002.
Interest expense was $364,599 for the quarter and $1,081,580 for the nine months ended March 29, 2003, compared to $379,077 and $1,156,727, respectively, for the same periods in the prior year. The decrease in interest expense was attributable to the lower level of borrowings during fiscal 2003.
Other miscellaneous income was $46,406 for the third quarter and $126,710 for the first nine months of fiscal 2003, compared to other expense of $36,572 in the third quarter of the prior year and other income of $33,493 for the first nine months of fiscal 2002. The income represents royalty payments made by a third party on certain precision drawer slide patents.
During the third quarter of fiscal 2003, the Company amended its income tax returns previously filed for fiscal years 1997 and 1999. A change in the federal tax law allowed the Company to utilize a portion of its capital loss from fiscal 1999 that had been previously disallowed. As a result of this change, the Company recognized an income tax benefit of $407,000 in the quarter ended March 29, 2003.
Excluding the impact of the amended returns, the effective tax rates for the quarter and the nine months ended March 29, 2003, were approximately 37.6% compared with the rates of 35.0% and 34.9%, respectively, for the same periods in the prior year. The higher rate reflects the impact of foreign tax rates and certain increases in state income tax liabilities.
For the quarter ended March 29, 2003, net income was $395,389, or $0.09 per diluted share compared to $844,627, or $0.19 per diluted share for the third quarter of last year. Net income of $1,442,080, or $0.32 per diluted share was recorded for the first nine months of fiscal 2003, compared to $2,494,755, or $0.54 per diluted share in the prior year. The decrease in net income in the third quarter and first nine months of fiscal 2003 was primarily attributable to the lower sales volume and higher selling costs.
12
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Net cash from operating activities for the first nine months of fiscal 2003 provided $4,087,331 as compared to $11,365,853 for the first nine months of fiscal 2002. The lower cash flow from operating activities reflects lower earnings in the first nine months of fiscal 2003 compared to the same period in fiscal 2002. In addition, higher inventory levels needed to support the launch of the new products and the consignment inventory program, combined with the payment of the legal settlements during the first nine months of fiscal 2003 reduced the cash generated by operating activities.
Cash used for investing activities was $2,553,471 for the first nine months of fiscal 2003, compared to $1,810,705 used in the same period in the prior year. Capital expenditures totaled $2,763,875 for the nine months ended March 29, 2003, compared to $3,236,926 for the nine months ended March 30, 2002. The fiscal 2003 capital expenditures represented investments in tooling for new products, including the Hopper™ and certain precision drawer slides, along with investment in our web-based customer service application. There were no significant capital expenditure commitments at March 29, 2003. Capital expenditures for the fourth quarter are anticipated to remain at approximately the same quarterly level incurred during the first nine months of the fiscal year.
Cash used for financing activities was $2,162,535 for the nine months ended March 29, 2003, compared with $6,843,819 for the nine months ended March 30, 2002. During fiscal 2002, the Company paid down the revolving line of credit by $3,750,000. The long-term debt balance has remained consistent at $20,000,000, when compared to June 29, 2002.
Anticipated cash flows from operations and available balances on the revolving credit line are expected to be adequate to fund working capital, capital expenditures, stock repurchases and dividend payments.
13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risks, which include changes in the foreign currency exchange rate as measured against the U.S. dollar and changes in U.S. interest rates. The Company holds a derivative instrument in the form of an interest rate swap, which is viewed as a risk management tool and is not used for trading or speculative purposes. The intent of the interest rate swap is to effectively fix the interest rate on part of the borrowings under the Company’s variable rate revolving credit agreement. The derivative was recognized as a liability on the balance sheet at its fair value of $2,455,011 at March 29, 2003 and $1,602,158 at June 29, 2002.
Quantitative disclosures relating to financial instruments and debt are included in the tables below.
The following table provides information on the Company’s fixed maturity investments as of March 29, 2003 that are sensitive to changes in interest rates. The table also presents the corresponding interest rate swap on this debt. Since the interest rate swap effectively fixes the interest rate on the notional amount of debt, changes in interest rates have no current effect on the interest expense recorded by the Company on the portion of the debt covered by the interest rate swap.
Liability Amount Maturity Date - --------- ------ ------------- Variable rate revolving credit agreement $20,000,000 November 1, 2004 First $20,000,000 at an interest rate of 1.34% plus weighted average credit spread of .75% Interest Rate Swap - ------------------ Notional amount $20,000,000 June 1, 2006 Pay fixed/Receive variable - 1.33875% Pay fixed interest rate - 6.25%
The Company has a sales office located in Canada. Sales are typically denominated in Canadian dollars, thereby creating exposures to changes in exchange rates. The changes in the Canadian/U.S. exchange rate may positively or negatively affect the Company’s sales, gross margins and retained earnings. The Company attempts to minimize currency exposure through working capital management. The Company does not hedge its exposure to translation gains and losses relating to foreign currency net asset exposures.
Item 4. Controls and Procedures
| (a) Evaluations of Disclosure Controls and Procedures | ||
| In order to ensure that the information that we must disclose in our filings with the Securities and
Exchange Commission is recorded, processed, summarized and reported on a timely basis, we have adopted
disclosure controls and procedures. Our Chief Executive Officer, William R. Dutmers, and our Vice
President of Finance and Treasurer, Leslie J. Cummings, have reviewed and evaluated the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) as of a
date within 90 days of the filing date of this Form 10-Q Quarterly Report (the "Evaluation Date")), and
have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures are
appropriate and that no changes are required at this time. |
||
| (b) Changes in Internal Controls | ||
| There were no significant changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of the most recent evaluation, nor any
significant deficiencies or material weaknesses in such internal controls requiring corrective actions.
As a result, no corrective actions were taken. |
||
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Item 1. Legal Proceedings
In September 1998 when the Company sold The Hirsh Company, the purchaser assumed the lease for the facility located in Skokie, Illinois. The Company guaranteed all of the lease obligations to the landlord through the expiration of the lease in August 2000. During fiscal 2000, the purchaser defaulted on the lease agreement. In May 2000, the landlord filed suit in the Cook County, Illinois Circuit Court against the purchaser and the Company as the guarantor. The claim was for unpaid rent, unpaid property taxes, building repairs and legal costs. On September 25, 2002, a settlement agreement was reached among the parties. During October 2002, the Company made a cash-payment under the settlement to the plaintiff in the amount of $300,000, which had been previously accrued on the balance sheet.
During the second quarter of fiscal 2003, the Company settled certain legal concerns involving potential royalty issues. As a result, the Company reported a pre-tax gain of approximately $800,000 as an offset to selling and administrative expenses in the statement of income.
The Canada Customs and Revenue Agency (“CCRA”) has performed an audit of the Company’s sales to its wholly-owned subsidiary, Knape & Vogt Canada. Preliminary results from a joint review by the Company and its customs broker indicate that the Company will be liable for certain customs transactions, however, the amount of any such potential liability is unknown at this time. The Company is defending its position that Knape & Vogt Canada is the importer of record for all Knape & Vogt goods shipped into Canada and management believes, that based on the information available at this time, any liability owed to the CCRA will not have a material adverse effect on the Company’s earnings.
The Company is also subject to other legal proceedings and claims, which arise in the ordinary course of business.
Item 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits Exhibit 99.1 - Certification of William R. Dutmers, Chaiman of the Board and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 - Certification of Leslie J. Cummings, Vice President of Finance and Treasurer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
| (b) | Reports on Form 8-K There were no reports on Form 8-K filed for the three months ended March 29, 2003 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
Knape & Vogt Manufacturing Company (Registrant) |
|||
| Date: | April 28, 2003
|
/s/ William R. Dutmers William R. Dutmers Chairman of the Board and Chief Executive Officer |
|
| Date: | April 28, 2003
|
/s/ Leslie J. Cummings Leslie J. Cummings Vice President of Finance and Treasurer |
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I, William R. Dutmers, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Knape & Vogt Manufacturing Company; |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a. | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| b. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| c. | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the Audit Committee of the registrant’s Board of Directors: |
| a. | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; |
| 6. | The registrant’s other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| Date: April 28, 2003 |
/s/ William R. Dutmers
William R. Dutmers Chairman of the Board and Chief Executive Officer |
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I, Leslie J. Cummings, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Knape & Vogt Manufacturing Company; |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: |
| a. | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| b. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| c. | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the Audit Committee of the registrant’s Board of Directors: |
| a. | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; |
| 6. | The registrant’s other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| Date: April 28, 2003 |
/s/ Leslie J. Cummings
Leslie J. Cummings Vice President of Finance and Treasurer |
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EXHIBIT INDEX
| Exhibit | Description |
| 99.1 | Certificate of the Chairman of the Board and Chief Executive Officer of Knape & Vogt Manufacturing Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
| 99.2 | Certificate of the Vice President of Finance and Treasurer of Knape & Vogt Manufacturing Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
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EXHIBIT 99-1
| I, William R. Dutmers, Chairman of the Board and Chief Executive Officer of Knape & Vogt Manufacturing Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: |
| (1) | the Quarterly Report on Form 10-Q for the three months ended March 29, 2003 which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934, and |
| (2) | the information contained in the Quarterly Report on Form 10-Q for the three months ended March 29, 2003 fairly presents, in all material respects, the financial condition and results of operations of Knape & Vogt Manufacturing Company. |
| Date: April 28, 2003 | /s/ William R. Dutmers William R. Dutmers Chairman of the Board and Chief Executive Officer |
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EXHIBIT 99-2
| I, Leslie J. Cummings, Vice President of Finance and Treasurer of Knape & Vogt Manufacturing Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: |
| (1) | the Quarterly Report on Form 10-Q for the three months ended March 29, 2003 which this statement accompanies fully complies with the requirements of Section 13(a) or 15(d) of the Securities Act of 1934, and |
| (2) | the information contained in the Quarterly Report on Form 10-Q for the three months ended March 29, 2003 fairly presents, in all material respects, the financial condition and results of operations of Knape & Vogt Manufacturing Company. |
| Date: April 28, 2003 | /s/ Leslie J. Cummings Leslie J. Cummings Vice President of Finance and Treasurer |
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